Utility company Eesti Energia may hold more media headlines, with its wind farm acquisitions, green energy and charges of monopoly behaviour. But there is another utility – not nationwide and with a smaller turnover, but still providing for one third of the Estonian population with an absolute essential, water – which merits a closer look.

Tallinna Vesi has seen a lot of growth and improvements in service since privatisation in the early 2000s, but this has been marred by court cases since 2010 at home and more recently internationally, primarily concerning its tariff mechanism and the right to set its tariffs as agreed in a Services Agreement with the City of Tallinn at the time of privatisation. There has also been a persistent claim that those tariffs are set too high.

We caught up with the CEO of Tallinna Vesi, Karl Brookes, at the head office just off Sõle Street in north Tallinn to get his side of the story as well as hopefully a practical overview of an often-overlooked area of life. So who is Karl Heino Brookes?

''I'm from Macclesfield, just south of Manchester in England,'' says Karl, whose first and second names are Estonian...

''My grandparents left Estonia in 1944 along with a lot of others,'' he explains.

''I hadn't been to Estonia, barring a short weekend trip, until I moved here in 2014 so it's been great to catch up with family in South Estonia who I'd never met before''.

''I've also lived in the Middle East, so being an expat wasn't that much of an adjustment, apart from the colder weather,'' he adds.

Tallinna Vesi CEO Karl Brookes. Source: Tallinna Vesi

Karl's career path started with a UK electricity utility in the 1980s which was bought by Northwest Water in 1995, becoming United Utilities (UU). Three years followed at infrastructure group Balfour Beattie, returning to UU, a significant shareholder in Tallinna Vesi, to work in Tallinn.

''It suited my circumstances and was an opportunity I couldn't turn down really,'' Karl says.

On a practical level for Karl and his British colleagues from UU, the office functions in English.

''I'd like to be able to communicate with older family members in Estonian, but the problem is once you start learning the language here, people often answer you in English anyway so it's easy to fall back into sticking with English,'' he says, recounting a common problem for the expat community.

Even the international media has repeated the not-safe-to-drink-the-water myth, so let's turn to that first.

Drinking water quality

An issue for visitors and expats more than locals, water quality in Tallinn is up to EU standard.

''We brought a lot of technical expertise from United Utilities. The water was safe to drink before privatisation in the early 2000s, but it was heavily chlorinated. We've dealt with that, but there's still this perception that you shouldn't drink the tap water, not just in Tallinna Vesi's catchment area but across Estonia''.

Raising public awareness about tap water is important for Tallinna Vesi – compared with bottled water, the benefits are indisputable, they say: ''We put five drinking fountains across Tallinn in summer, plus posters at the airport noting that the water is fine. A lot of natural resources and energy is being wasted for bottling water, when in fact, tap water is just as good for you and costs a fraction of what you would pay for a bottle,'' says Karl.

My own anecdotal evidence is my cat; normally picky, it drinks Tallinn water straight from the tap (literally) without problems.

Figures back the claim too – 2017 saw a 99.93% compliance in water quality at customer's tap (2,973 samples across the area). In Q2 2018 the quality reached 100%. Tap water in Tallinn is drinking water, and according to recent survey done by Kantar Emor, 73% of citizens agree.

Where does Tallinn's water come from?

Rivalling the legend of Lake Ülemiste's Lindakivi ("Linda's rock") is a similarly fictional claim that the 9.4 sq km lake, dominating the south of the city, is Tallinn's sole drinking water source.

''If it was, the lake would have dried up a long time ago,'' Karl continues, especially in 2018's virtual drought.

''The catchment area extends way beyond the lake. Created in the 1970s a catchment system with a total area of 1800 sq km was created''.

This is made up of water reservoirs and rivers which are connected by channels into an integrated system. Paunküla and Soodla water reservoirs, the latter 50 km away from lake Ülemiste, are used to replenish the lake. Water volumes are regulated at the hydropoints.

Soodla Reservoir. Source: Tallinna Vesi

Warm weather makes the treatment process more challenging as algae accumulates, requiring more cleaning and electricity. Lake Ülemiste is only 2.5 m deep on average.

Being alongside the airport, aviation-related incidents can happen. In 2010 a Polish cargo plane crash-landed on the then-frozen lake, not the first incident of its kind. Emergency procedures exist to combat aviation fuel or other pollutant leak.

At present Tallinna Vesi hopes to develop things and run a pipe under the lake bed, giving an alternative raw water source that could be used in case of emergencies or to manipulate raw water parameters.

Lake Ülemiste shoreline is no go to the public and fenced off due to sanitary reasons – Tallinn's main raw water source needs protection.

The decline of industry and the advent of water metering (unknown in the Soviet era) means far less water gets used nowadays, though still around 60 mega litres per day. This is however about half capacity, so Tallinna Vesi can cater to greater needs even in case of the expansion of the city.

Furthermore, 5000 cub. m per hour of waste water gets treated at Paljassaare in north Tallinn at maximum flow periods. This is mostly from storm drainage, rather than washing machines. Heavy rain can overload the groundwater system, connected to the sewage system, by as much as ten times. This did happen in June, hitting common flood spots like the Stockmann junction in central Tallinn or the Kristiine railway bridge. Tallinna Vesi personnel work on a continuous 24/7 basis to ensure uninterrupted supply and waste water treatment.

Short-sightedness in construction, for instance the ubiquitous underground car parks in new builds, sometimes fail to allow for climactic realities and get flooded too.

Tallinn water catchment area. Source: Tallinna Vesi

What about the rest of Estonia?

Being the sole privatised water utility in Estonia means running against the flow as noted. So is the public better served by private sector water?

''When I started working in the sector in the UK the water authorities were still nationalised, and there were a lot of problems related with river and sea pollution, outdated treatment plants but all that's been transformed there and huge amounts of efficiency gains were made too, which I think has been a good thing''.

Tallinna Vesi, too, reduced its workforce by 66% to around 300 in the wake of privatisation. Significant investments, resulting in improved parameters of water quality, leakage level, duration of interruptions, number of sewer blockages and water interruptions, have been made.

Early 2000s privatisation benefits

Improvements other than in quality include in leakages, down to 14% (2nd in the EU only to Germany at 5%).

Karl admits that the leakage level will never reach zero. "There will always be a risk of pipes bursting due to somebody damaging them for example, so you´re always going to get some leakages. Economically, from one point on, reducing leakage would cost more than it's worth so it is a balancing game. Right now, however, we still strive to do even better''.

Other metrics also bode well. Improvements in service outages mean no customer is without water for more than 12 hours, a statistic many other companies would be proud of, says Karl.

Company structure and ownership

With a threefold ownership structure, UU owns a bit more than 33% and has four board members (of nine). One third belongs to the City of Tallinn, with board members Katrin Kendra, Toivo Tootsen and Priit Lello. Independents make up the remainder; board members are Priit Rohumaa (chairman of the council in Estonian Railways) and (former chancellor of justice) Allar Jõks.

Tariff freedoms the heart of the matter

The frequency of ERR News stories on Tallinna Vesi is telling. After a few pieces in 2010, when the portal started, there was a spike in 2011 of 16, more than the ensuing five years. The tariff controversy with the Estonian competition authority (ECA) was the main culprit (though a debt issue with BREM real estate firm accounted for a few articles).

The charge that Tallinna Vesi overprices its tariffs, while a common media story, doesn't reflect reality, says Karl.

''For a start, some of the other municipalities charge significantly more for their water. Depending on which district of Tallinn you're in, the tariffs are much lower in Tallinn than a lot of other locations''.

According to recent figures, Tallinna Vesi is second cheapest in waste water disposal.*

Tallinna Vesi rates also constitute a much smaller percentage of average disposable income than guidelines demand.**

''A big EU law change on issues like water quality or waste water might require more investment and thus higher tariffs, but the point is the current level is not what it should be''.

This seems to be the crux of Tallinna Vesi's issues. The only private water utility, it has been something of a victim of its own success. Whether the ever-present 'jealousy of the neighbours' phenomenon is at play is uncertain, but it is clear the tariff issue is one long, drawn-out farrago.

Lost revenue of €72 million

A tariff dispute, related to the services agreement, has been ongoing since 2010 for Tallinna Vesi. In December 2017, the local dispute came to an end with the Supreme Court´s unfavourable decision. "The Court concluded that the Competition Authority (ECA) is not bound by the tariff agreement contained in the Services Agreement, which had been signed between the water undertaking and the City of Tallinn upon privatisation. This means that AS Tallinna Vesi has to comply with the ECA's precept to submit a new tariff application," explains Karl.

"The approval process of the tariff is now ongoing, and even though the ECA allows a certain profitability, their decision can have quite an impact on future revenues," he added. ''The saddest thing for me is there hasn't been a negotiated solution in all that time,'' says Karl.

Tallinna Vesi hasn't sat still on the issue, going to both the International centre for settlement of investment disputes (ICSID) and, later, the European Court of Human Rights (ECHR). The arbitration furthermore needs to decide, whether the Agreement on the Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the Republic of Estonia has been breached.

''From the start of the dispute to the ending of our current contract in 2020, the latest estimate by international arbitration, admittedly a moving target, is about €72 million in lost revenue''.

''In other words we haven't been able to operate with the tariff mechanism in the original services agreement''.

Arbitration

''In the original contract there was an appeal mechanism where a dispute arose. This is quite common in CEE countries where investors from 'western' countries are concerned. It gives them the opportunity to turn to international arbitration, if the investors' interests are harmed by let's say some political changes''.

''It is an expensive, time-consuming process, however. The ICSID hearings were in October 2016 and there's been a long delay in getting the verdict, which at the moment is looking like the end of this year,'' (ICSID has a panel of three lawyers, one for each party and a chair chosen by both parties).

''I was in Paris for part of ICSID the hearing, the amount of documentation, witnesses etc. is immense''.

The process is nevertheless transparent. For those interested the link to the recorded hearings is here.

Precedent Dutch/Slovak case

Even if ICSID favours Tallinna Vesi, the story may still run and run. A similar arbitration some years ago saw a Dutch healthcare company which had invested in a Slovak utilities company winning its appeal at ICSID but the European Courts later nullifying the decision.

''The state's lawyers here are obviously watching with interest that development and may go down the same Slovakia route as well,'' Karl says.

Future political outcomes

The timing of the tariff setting and the ICSID outcome are close; the latter is all about compensation for lost revenue. Another appeal route, through the European Commission, is at an embryonic stage at present.

Naturally these machinations could have a negative effect on potential investor morale, not just in the water sector but anywhere in Estonia investors are looking at.

The 2019 general election doesn't seem to promise much either, even if a (free market championing) Reform-led coalition emerged. Tallinn city is (more public sector-oriented) Centre's domain. Previous Reform prime ministers Andrus Ansip and Taavi Rõivas didn't seem to make a difference to the Tallinna Vesi case either.

In short, from the outside it looks like Tallinna Vesi have been forced to keep tariffs higher than it would like, albeit at a lower level than other providers in Estonia, but then get attacked precisely for having too-high tariffs. Which does sound like a heads I win, tails you lose scenario.

Two hundred or so water providers service around 800,000 people across Estonia. Compare that with the one company in Tallinn serving 450,000 people and privatisation's efficiency argument seems to hold water, not to make a pun.

Smaller locales especially suffer from higher prices which consolidation would combat, Karl argues. He favours four water companies nationwide, but the practicalities involved – evidenced by problems in even merging small village councils – means the process would be arduous.

Unlike the UK where consolidation followed nationalisation, in turn followed by privatisation in the Thatcher era, Estonia could at least cut out the intermediate phase, however.

''We'd love to play a part in bringing our expertise to any mergers and consolidation processes,'' says Karl.

''When I started I said that these tariff issues would be sorted within a few months, but that turned out not to be the case – four and a half years on and here we are still in that situation. I think when the privatisation first happened that people hoped the company would grow and consolidate with other municipalities, but that hasn't happened because of that fallout''.

''We need to get the dispute out of the way and, depending on the outcome, get the contract from 2020 sorted out – we do have a concession with the city till 2025, but in any case it's not just a contract that can end easily because of the long-term assets (ie. all the infrastructure) we own''.

''We've got the Watercom business going from strength to strength, though, and there's about €5 million in external construction work we're doing, so despite all the problems there are lots of positive signs for the future.

''Another advantage we have is that since contracts are often held with apartment blocks rather than individuals as in the UK, this simplifies things and means our incidence of debt would be the envy of a lot of authorities there''.

We contacted the ECA to ask for their comment on some of the issues noted above.

They issued the following (summarised) statement from ECA Director General Märt Ots:

"First it is important to emphasise that a number of investments aimed at improving water quality were made before privatisation. The improvement in water quality in Tallinn and elsewhere is a matter of general economic development in Estonia and is not directly linked to the ownership, we believe''.

''There are very strict quality norms which are carefully checked by the relevant authorities''.

''The ECA never disputes the necessity of investments or costs, which have to be made for providing water services to required standards''.

''Additionally, company profitability is not linked to water quality; the company's obligation is to supply the water in accordance with the norms in our opinion''.

''Second, it is not appropriate to compare the tariffs in Tallinn, with 450 000 inhabitants, with smaller, less densely-populated municipalities. As with all kinds of infrastructure, population density and the size of a settlement are critical factors. It is remarkably less costly to provide services in a large city''.

''Water supply has historically been one of the strongest monopolies in general, so a regulator needs to oversee tariffs since consumers cannot switch supplier''.

''The CPI-type of tariff referred to at the interview was not the correct one, in our view. Tallinna Vesi and the City of Tallinn made their own deal on tariffs, which we are concerned is controversial as regards consumer rights''.

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*As at 30.06.18, figures (in Estonian) available here, Estonian Waterworks Association put Tallinna Vesi waste water removal, as much a water cost as the more-familiar tap water for drinking/washing etc., at 2nd cheapest (from 48 listed) in Estonia, and tap water at 12th cheapest (both figures for private residents).

** According to the World Bank, water tariffs should not exceed 4% of net disposable income; in Tallinn the figure is around 0.95%.